Support and resistance – a cornerstone of VPA

Question

Thanks again Anna. Apart from not seeing the VPA that week, I think my problems were largely to do with lack of patience and a ‘loss aversion’ having moved to real money.

One of the main reasons i gave up programming EAs was that i gradually learnt how different signals are appropriate to different days, weeks or months in the market. And that is also partly about depth of understanding in the fundamentals. I’m not a complete novice about the fundamentals but i’m looking forward to your angle on it in “A Three Dimensional Approach to Forex Trading” which should arrive right after Easter 🙂

I cannot find where to post on annacoulling.com. Would it help if i post the following (or any of the previous questions) on your Youtube channel?

I really think i could gain a lot from an increase in appreciation of the subtleties of S&R zones, what i’m preferring to call ‘stickiness’ at the moment. It would be invaluable to me if you have time, to hear in your experience, what is it that most weakens S&R zones? One factor is presumably the market simply spending time away from a zone and how far away that is; as i understand it, because the big money would remove orders and stops from there and take losses or profits on trades opened there.

Can you offer any other insight in to what weakens these zones? How about when the price shoots through a zone? Or when it gradually grinds its way through a zone with steady high volume? Is that going to strengthen the zone or weaken it? I guess this partly relates to your warehouse analogy that i like so much. I’m reluctant to trust Level 2 data in answering this and would rather keep a multi-dimensional view on the current situation than get pulled off in to overly precise detail.

Any answer gratefully received as always Anna. No offence if you do not have time. You see so busy and it clarifies things for me just to write it anyway 🙂

All the best

Answer

Support and resistance is one of the cornerstones of volume price analysis, and is where trends are borne and created. Many traders become frustrated when markets move into congestion phases, but this is one of the most exciting times, and all you need is patience. Volume then provides the ‘three dimensional view’ of the price action, both during the phase itself, and also in any breakout and move away from these regions. Of course, seeing congestion with hindsight is easy, and so we have to develop ways to see the price action as it starts. This is where VPA comes to our aid, defining each move through the analysis of the price action and associated volume. A classic place to watch this is ahead of major news releases, where price action narrows, and volume declines dramatically. Here I use a simple pivots indicator which then describes the floor and ceiling for the region, dynamically. On the subsequent release of the news, price action explodes as does the volume which then validates the move. With regard to how far the market moves, this is always as issue, as on many occasions a breakout will occur, only for the support or resistance level to be tested once again before moving away. This is often called a fake out, but again volume will help to verify. This is all a question of judgment as there are no hard and fast rules. What we are looking for is a close of the candle or bar, well above or below the congestion phase, coupled with high volume, which then validates the move out and into the trend as it develops. Remember also that in any new trend, there is always likely to be a low volume test, so this this something to watch for as the price action develops.

This is fully explained in Forex For Beginners. In addition I also like to use a support and resistance indicator which again draws these lines dynamically. Finally don’t forget that support and resistance levels are also great places to locate any stop loss, as these are natural barriers of price protection created by the markets themselves – so why not use them!!

Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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